Social Media

Why Launching a Startup Is More Expensive Than You Think

Dave Rosenberg is the CEO of Nodeable, which offers a social platform for systems data.

One of the things we hear a lot about in Silicon Valley is how cheap and easy it is to launch a startup these days. After all, high-quality open source software is free, the cloud makes computer power far less expensive, and anyone with an Internet connection can learn Ruby and CSS. Throw in a few YouTube videos and a Twitter account, and you’re golden — or so we are led to believe.

While all of these factors are true to an extent, the truth of the matter is that the reduced costs of hardware and software are easily offset by the expense of engineers and experienced business people. And no matter what the latest trends indicate, you will eventually have to spend money on PR and marketing.

I’m now in my second founder/CEO role, having raised more than $18.5 million in venture financing. In the last 10 years, I’ve been through three other venture-backed startups (two were IPO’d and one was acquired), and if one thing has become clear, it’s that no matter how inexpensively you think you can build a business, your calculations will be off — usually by a lot.

“The trick is determining the exact amount of money you’ll need in the first place, and figuring out where to spend the money to extract the most impact."

No doubt early-stage companies can be started on a shoestring by low-paid entrepreneurs, but when financing a scalable, sustainable product, a free application server won’t make much of a difference. Nearly all of your costs will be headcount, primarily in the engineering department. And in case you haven’t heard, engineers are in short supply and get paid a lot these days, especially in the valley.

This is not to suggest that you can’t succeed on a budget with a skeleton team. The trick is determining the exact amount of money you’ll need in the first place, and figuring out where to spend the money to extract the most impact. For example, my company decided early on to hire a UI designer, which has helped tremendously with our product development.

We also soon decided that we wanted to outsource as much of our operations to hosted services as we possibly could. Then we allocated the saved money into hiring the highest quality developers available — especially those who have experience working with a distributed team.

Many first-time entrepreneurs envision getting in the door with the right venture capitalists (VCs), financial deities who will nurture their ideas and lavish cash upon them. Sometimes this is true, but generally speaking, you will hold two to four meetings with a venture firm — even when you already have amiable contacts there. And that still doesn’t guarantee they’re going to fund your vision.

Getting funded is hardly the end-all. In fact, it’s barely even the beginning for most companies in their seed stage financings. That said, to secure funding, it’s vital to craft a coherent pitch, especially if you don’t already have a prototype or working product.

Early-stage seed and angel investors all realize that a business will encounter a huge range of flux very rapidly. What they’re evaluating is the quality and compatibility of the team, the overall market size and the feasibility that you and your crew can make something big happen. That doesn’t mean you’ll receive a blank check. Venture firms put their money into your company with the expectation (not just the hope) that you’ll create a substantial return.

None of this advice is meant as a scare tactic, or a suggestion that you can’t or shouldn’t start a company. In fact, I encourage everyone — even my own employees — to target a business passion that will make them happy and wealthy.

The availability of low-cost technology is just one piece of the puzzle. The path from seed idea to successful business is a long and arduous process — one that is simultaneously painful and hugely rewarding.

Mashable
is a global, multi-platform media and entertainment company. Powered by its own proprietary technology, Mashable is the go-to source for tech, digital culture and entertainment content for its dedicated and influential audience around the globe.